Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Sunoco LP (NYSE:SUN)
Q2 2020 Earnings Call
Aug 7, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunoco LP's Second Quarter 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Scott Grischow, Vice President of Investor Relations. Thank you. You may begin.

Scott Grischow -- Vice President Investor Relations andTreasury

Thank you, and good morning, everyone. On the call with me morning are Joe Kim, Sunoco LP's President and Chief Executive Officer; Karl Fails, Chief Operations Officer; and other members of the management team. A reminder that today's call will contain forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the partnership's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors.

During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. I'd like to begin today's call by reviewing the financial and operating results for the second quarter of 2020. Despite the reduced volume we saw this quarter, our business performed well, and our cost reduction efforts are on plan. We are on solid financial footing as we continue to navigate this challenging environment. For the second quarter of 2020, the partnership recorded net income of $157 million, which included the benefit of a $90 million noncash inventory adjustment. Adjusted EBITDA was $182 million compared to $152 million in the second quarter of 2019. Fuel volumes totaled 1.5 billion gallons, down 26% from a year ago. The second quarter volumes reflect a full quarter's impact of COVID-19 on our business. Fuel margin was $0.135 per gallon, up from $0.091 per gallon for the same period last year. Lease income of $34 million was essentially flat, both sequentially and year-over-year. Our gross profit from non-motor fuel sales was $30 million, which represented a $22 million decline from the previous quarter. As a reminder, the first quarter included an $18 million favorable legal settlement. Total operating expenses for the quarter decreased to $97 million from $143 million in the first quarter and $123 million a year ago. Karl will provide additional detail on expenses in his remarks.

Moving on to capital. We spent $14 million on growth projects and $4 million on maintenance capital in the second quarter. As we announced in March, we expect to spend approximately $75 million in growth capital for the full year and approximately $30 million in maintenance capital. Second quarter distributable cash flow as adjusted was $122 million, yielding very strong coverage ratios of 1.41 times for the current quarter and 1.55 times on a trailing 12-month basis. On July 28, we declared an $0.8255 per unit distribution.

On the balance sheet, our long-term debt decreased by $110 million to just under $3.1 billion. Our liquidity remains strong, with $1.3 billion remaining under our revolving credit facility and no debt maturities prior to 2023. We ended the quarter with a leverage reading of 4.07 times, down from the 4.39 times in the first quarter. Finally, as many of you saw in our June press release, Sunoco LP's Chief Financial Officer, Tom Miller, is retiring from Sunoco effective September 1. On behalf of the entire Sunoco LP leadership team, we would like to personally thank Tom for his many contributions to the partnership and wish him health and happiness in the next chapter of his life.

I will now turn the call over to Karl.

Karl Fails -- Chief Operations Officer

Thanks, Scott, and good morning, everyone. Our strong results in the second quarter highlight the resiliency of our business model, even in the face of the continued impact of COVID. As Scott mentioned, our second quarter volumes were down 26% compared to last year. Looking more closely at the monthly trends, volumes bottomed in mid-April with year-over-year declines of around 45%, but showed meaningful improvement from there. In May, our volumes were off about 30%, followed by a decline of about 15% for June.

The pace of continued recovery in fuel demand has flattened over the last several weeks with the rise in coronavirus cases in some geographies. For the month of July, we averaged about 15% of last year's volumes and have seen similar results in the mid-teens in early August. Our normal seasonal pattern is for average daily volume to rise each month from the beginning of the year to a peak in August at the end of the summer. This means that even as volumes have flattened on a relative basis, we have seen increases in absolute volumes so far in the third quarter. I'd like to provide some context around these volume trends. We have clearly benefited from the geographic diversity of our fuel distribution network. While demand in southern states held up more strongly than in other areas of the country during the onset of the pandemic, it has been more impacted on a relative basis in recent weeks as re openings are scaled back. Contrast this with the mid-Atlantic and Northeast states, which continued to see improvement as re openings progress. While volumes were notably weak in the second quarter, fuel margins showed consistent strength throughout the quarter, even in the face of increasing commodity prices.

These strong margins have continued into July and August. Taking a macro look, the strong margins can be primarily attributed to broader market forces that have impacted the industry over the course of the last few months. Fuel volume declines across the country increased the breakeven cost for many operators and provide favorable margin environments for market participants from single site operators to companies with scale. These increased fuel margins have done much of the work to offset the gross profit impact in each channel of distribution. The volume declines and resulting margin increases also occurred in a favorable environment for the consumer, as the average retail price for gasoline during the second quarter was the lowest since 2016. While these market forces provide a favorable landscape for our gross profit optimization strategies, the rest of the work must be done through expense reductions. We are skilled and strongly positioned in both of these areas, and thus have been able to weather demand declines as well or better than most.

We have a deep knowledge of the markets where we operate and had committed organizational resources to gross profit optimization and expense management well before this recent demand shock. Scott mentioned our total expenses of $97 million for the second quarter and that we are on plan to deliver total expenses of between $460 million and $475 million for the full year 2020, consistent with our commentary last quarter. Since a portion of the expense reductions consisted of volume-related items, we would expect that the second quarter would be our lowest expense quarter of the year. As volumes have recovered, we anticipate quarterly expenses in the back half of the year being higher than our second quarter run rate, but well within the range that we have communicated.

As we look forward to the second half of 2020, there is still uncertainty around the shape of the volume recovery curve. However, we expect market forces and our gross profit optimization strategy to result in fuel margins remaining above our historical annual range. Our commitment to expense management delivers results directly to the bottom line. As our second quarter performance demonstrates our ability to optimize within the current market environment as well as our focus on capital and expense management will remain key. We are confident that our demonstrated strength in operational and financial discipline will continue to yield solid financial results throughout the rest of the year and beyond.

I will now turn it over to Joe to share some closing thoughts. Joe?

Joseph Kim -- President, President & Chief Executive Officer

Thanks, Karl. Good morning, everyone. Let me start off by thanking our employees and our field distribution partners for their continued dedication in keeping Sonoco strong and stable during these unprecedented times. Last quarter on our earnings call, we suspended our 2020 EBITDA guidance, given the heightened level of uncertainty at that time. Today, we have far better clarity for the rest of the year. As a result, we believe our 2020 EBITDA will be greater than $700 million, which is above the original guidance that we provided last December. Our revised outlook has been shaped by a few key items. The first item is obvious. We have delivered two really strong quarters that are already in the books. Second, we believe the fuel margin environment will remain attractive.

Although the exact shape of the demand recovery curve is still to be determined, we expect the margin environment to be above historic average. It is too early to determine whether recent events have established a new long-term baseline for margins. However, we believe the industry breakeven point for fuel margin has gone up for various operators, meaning certain operators will require greater margins to remain profitable, and this is good for us. In a different scenario where volume rapidly recovers and fuel margin reversed the previous mean, this is also good for us, less margin but more volume. Overall, I believe the gross profit environment for the second half of the year will remain very attractive. But it will be difficult to match the first half of this year given the historic drop in crude prices that occurred in March. Finally, a revised outlook reflects our ability to deliver on the expense guidance that Karl noted earlier.

The path we're on now to have an exceptional strong year was not exactly how we envisioned or described it back in December. However, despite the obvious challenges facing our nation, we expect to deliver yet another strong year. Our financial stability has positioned us for growth. We continue to deploy capital to grow our fuel distribution business. The opportunity sets remain robust, and we expect these organic opportunities to remain year after year. On the midstream side, we have rededicated resources to look for highly synergistic acquisitions that further enhance our overall portfolio. Let me close by saying that over the last few years, we have built a very resilient business model. We remain proactive throughout the current challenge as well as any future challenges to ensure a stable long-term future for Sunoco.

Operator, that concludes our prepared remarks. You may open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Shneur Gershuni with UBS.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Hi, good morning everyone. It's actually Shneur, though. Maybe to start off, I'm just wondering if you can talk about the optimization behavior of your competitors in the marketplace right now. Joe, in your concluding remarks, you sort of talked about how optimization benefits would come down if volumes came back aggressively. But is there a scenario where everybody stops trying to plan for market share and there's an opportunity for margins to actually maybe not be at these current levels, but be higher than they've been historically. And overall, there would be a net benefit to everyone.

Joseph Kim -- President, President & Chief Executive Officer

So let me try to give some more color on the breakeven comment that I've made and Karl made. Whenever volumes drop dramatically, obviously, in the second quarter, especially in April, people had less volume and then inside sales were affected. People try to cut expenses to offset that, but the amount of expense cuts to match the decline in volume was more than difficult to achieve. As a result, the breakevens went up for a lot of players. And when breakeven goes up for a lot of players, people have to get margin in order to offset the losses they had or if they're offsetting their losses, everybody still wants a reasonable rate of return on their investment. So in that scenario, when volume went down, the market kind of recalibrated with a higher margin. So if demand is sluggish on recovering, this breakeven is going to remain. If demand starts skyrocketing back up to previous levels, then there's definitely a scenario where the margin could revert back to the mean because breakevens are going down. But there's also a third scenario. A third scenario, I think that's what you're trying to highlight, is that volume starts recovering, a new baseline is established on the margin side. That is a potential scenario. From a Sunoco perspective, we're good in all three scenarios. Obviously, higher margins, kind of a rebalancing of margins above the roughly $0.10 that we guided previously would be great for us at a higher volume. But regardless of any of those three scenarios that I highlighted, I think we're in a very good position.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Okay. That makes total sense to me. And maybe just to pivot a little bit here, you're kind of headed into a positive free cash flow even after distribution type of scenario. You did mention that you would be looking for some acquisition opportunities. But absent finding those opportunities, what is the plan for the cash? I mean you're around your leverage targets. Your bonds are trading extremely well. Do you consider buying back units, maybe some from your general partner? Just kind of wondering what the options that you're considering absent finding a reasonable acquisition target.

Scott Grischow -- Vice President Investor Relations andTreasury

Yes. Shneur, this is Scott. I'd say first and foremost, we're committed to maintaining the distribution and operating at or above that coverage ratio that we've communicated in December of 1.2 times over the long term. I think we're also comfortable with our targeted leverage range of 4.5 to 4.75. I think the leverage reading for the past few quarters amid the environment of unprecedented demand destruction that we've talked about on this call, I think it's proven the resiliency of our business model and our ability to support our current debt levels. And so what does that give us? It gives us the opportunity to identify and execute on high-return growth opportunities, both organic and acquisition based. And I think all that to say we've positioned some with a healthy balance sheet, strong leverage and coverage ratios that are going to be able to give us the opportunity to take advantage of growth opportunities. I don't foresee a unit buyback program in the card for us. I think our focus is more to deploy the free cash flow toward organic and acquisition growth opportunities.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Yes, I completely understand that. And just to make it clear, I wasn't implying that you were considering cutting the distribution. You're exactly the opposite, just given how strong everything has been. But I guess, so if an acquisition opportunity doesn't materialize in the near term, I guess your primary focus would just be to keep the facility at 0 and maintain cash. Is that kind of the read there when you say that you're not interested in doing buybacks at this point?

Joseph Kim -- President, President & Chief Executive Officer

Shneur, probably another way of saying it is that I highlighted a little bit on my prepared remarks that there is we see ample robust opportunities in the field distribution sector year-after-year. And I think if you look back and kind of trace Sunoco since the 7-Eleven transaction, we've been growing EBITDA. We I think we've highlighted over and over that the steel distribution opportunities for us. We flipped over from an acquisition strategy to organic strategy because we saw a good pipeline. We developed internal capabilities, and they're paying off for us. Then we started switching the path a little bit by adding midstream acquisitions and looking at organic projects. So I think we like what we have both in the field distribution sector and the midstream sector. So as far as the free cash flow, we have at a certain point, if that dries up or we don't like that, obviously, we have to pivot it to other ways of creating value. But for the foreseeable future, we like the opportunities in front of us from a capital standpoint. And obviously, acquisitions are more opportunistic and have to be at the right price and fit all the financial criteria that we set for ourselves.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Perfect. Or really appreciate the color today. Guys, thanks for taking my questions.

Operator

Our next question is from Theresa Chen with Barclays.

Theresa Chen -- Barclays Bank PLC -- Analyst

Hi there, thanks for taking my questions. First, just on the margins, the CPG margin, even outside of this quarter, last quarter, it's been for years really that we've seen outsized results above the long-term range. And I was just wondering if you could remind us again, what do you think are the primary drivers of outperformance here? Is it economies of scale, your diversification distribution channels? And how sustainable do you think it is going forward?

Karl Fails -- Chief Operations Officer

Theresa, this is Karl. Here's how we look at margins. I think some of you have heard us over the last number of quarters, I kind of put this hypothesis out that the portfolio of fuel distribution channels that we have really has this characteristic of where we have favorable market conditions, like we had in the first quarter with what Joe mentioned on his prepared remarks, that gasoline prices fell quite a bit in March, where we would capture a good amount of upside on the margins. And then when we would have a tough quarter from a market favorability perspective, so say a large movement up, that we would put up solid margins, definitely lower, but inside the $0.095 to $0.105 guidance range. So I think it's really that asymmetry that when you look on an average basis, we've averaged above that range. So the factors that play into that are really the portfolio that we've crafted, the geographic diversity that we have. We've talked for a long time, a couple of years, about gross profit optimization, our ability to look at volume and margin together and respond to that, that definitely has proven out in this quarter. So those are the kind of things that I think we think about and you guys should look at going forward.

Theresa Chen -- Barclays Bank PLC -- Analyst

And in terms of your wholesale distribution network and channel. So we recently saw the announced a transaction of 7-Eleven's acquisition of Speedway. And I believe they have entered into a long-term fuel supply arrangement with the buyer. Years ago, you did something very similar and entered into a long-term fuel supply agreement with what is now your largest customer at what I believe was a rate that is not only far below your long-term guidance, but certainly below what you've been printing recently. Does the recent transaction have any implications for your renewals recontracting with the customer? And can you remind us when that comes up?

Karl Fails -- Chief Operations Officer

Sure. Yes, our relationship with 7-Eleven is very solid. The original contract that we signed was a 15-year agreement. So just at the end of the first quarter of this of 2020, we finished our second year on that contract, so it has little less than 13 years left. Here's what I'd say about 7-Eleven, is they've been a great partner. They're a well-run company. And I think we feel good about the relationship we've had with them. We think the we don't comment on the details of other deals. But from what we've read in the press about the Speedway-7-Eleven transaction, this should be great for 7-Eleven in their state of goal of continuing to grow. And we think a good, stable partner just strengthens our relationship going forward.

Theresa Chen -- Barclays Bank PLC -- Analyst

Okay. And along those lines, it's been publicly stated that the seller has option to grow with 7-Eleven as they achieve their targeted stores within the U.S. Do you have anything similar to that? Can you also grow with the customer per your arrangement?

Karl Fails -- Chief Operations Officer

Yes. I'll if you go back a couple of years, that was actually baked into our original deal that over the first four years of our relationship with seven Eleven that it was built into the contract, some growth structurally. In addition to that, we obviously have the opportunity to work with them and based on our relationship where it made sense. So I'd say we have both the contractual growth as well as additional upside.

Theresa Chen -- Barclays Bank PLC -- Analyst

Thank you.

Karl Fails -- Chief Operations Officer

Thanks, Theresa

Operator

Our next question is from Spiro Dounis with Credit Suisse.

Spiro Michael Dounis -- Credit Suisse AG -- Analyst

Good morning, guys. I just want to follow up on that last question, but maybe ask more broadly about how you're thinking about changes happening on both sides of your value chain. I guess on the supply side, seeing some refinery closures and indefinite idling. Some are turning into renewable diesel facilities on the demand side, seeing some ongoing consolidation in retail. So just curious, over the long term, how do you think about that impact on your business, what you're doing to adapt to that, and overall, what that means for margins over time?

Karl Fails -- Chief Operations Officer

Spiro, this is Karl. On the supply side, one of the, I'd say, foundations of our strategy that we've talked about for a while is that we felt, overall, that the United States was long product and are being in our spot in the value chain, buying in that long environment and then supplying either into our customer stores was a good spot. So I think even with these unprecedented falloff in demand, that just makes us longer, right? So I think some of the rebalancing that we've seen in the market is appropriate for the demand that we see. I spent a long time in the refining industry myself and whatever the demand level will be, the refining business balances to that. So whatever the future holds, I think that will continue to be true. But the U.S. has really turned into an export market, and that definitely strengthens our ability on the margins. I'll let Joe comment on the retail side.

Joseph Kim -- President, President & Chief Executive Officer

Yes. On the retail side, the 7-Eleven transaction, I think, was reported about $21 billion, and I'll probably reinforce the comment I made earlier about breakevens and reasonable returns. So I think whenever you somebody spends $21 billion on an acquisition, they expect a reasonable rate of return on that one. So I think it could be constructive to margins going forward. I don't see a scenario where this will be actually negative toward margins going forward. And I think the other thing I would note about the 7-Eleven transaction is that it depends on how you want to calculate the valuation of this. I think it does highlight and reminds investors the value of quality downstream assets. And we at Sunoco, we have quality downstream assets. And our consistent performance kind of reinforces quality of our business. When we factor all these together, I think there's a compelling argument that there's some undervaluation of Sunoco.

Spiro Michael Dounis -- Credit Suisse AG -- Analyst

Yes. Fair enough. Just second question, maybe to follow up on some of your prepared remarks, just around what you're seeing regionally. You gave us a pretty helpful breakdown last quarter around some of the different regions. And despite some shut-in impacts, it sounded like volumes are actually pretty resilient. You mentioned some Western states seeing increased covet issues, but it sounds like demand in your primary regions are rebounding a little stronger, I guess, is that fair? And then could you give us a little more detail on what you're seeing across the different regions?

Karl Fails -- Chief Operations Officer

Sure. I think I mentioned some variability in my prepared remarks, but I can add a little bit more color to that. If you think about the Northeast states that we where we saw we have a decent amount of business and we saw, I'd say, a more rapid decline at the end of the first quarter, they've continued on their trajectory of recovery without a lot of change. On the Southern states where you've seen more COVID cases come up, it's kind of interesting. I mean, Texas, where we have a decent amount of business, and it's really in our backyard. So we know Texas pretty well. I'd say Texas has definitely the recovery volume has flattened over the course of the last several weeks. But then you look at a state like Florida, where we also have a decent amount of business and even with the reported COVID cases there, that volume recovery has continued strengthen and is probably relative to last year, one of the better states, volume-wise, where we operate. Then you have maybe a different end of the spectrum is our operations in Hawaii. Hawaii obviously has a large component of their economy is based on tourism. And with that slowdown, I'd say our pace to volume recovery has not been as quick. And the current volume relative to last year is, I'd say, below the national average or below the mid-teens that we've said for our whole network. So it really varies by state and kind of what the government does. But even on top of that, it really depends on the consumer in those markets and what they do. I think that variability highlights, and I mentioned this in my prepared remarks as well, the value of our geographic diversity. And we talked a few minutes ago about our 7-Eleven deal. That's the foundation of our fuel distribution business. And then the remaining fuel gross profit based on this diversity and geographies and channels, and I think that's really played out. So even where we might have some lower volume performance. We have other areas with higher volume performance and offset it.

Spiro Michael Dounis -- Credit Suisse AG -- Analyst

It. Very helpful. Thanks guys.

Operator

Our next question is from John Royall with JPMorgan.

John Macalister Royall -- JPMorgan Chase & Co -- Analyst

Hey, good morning guys. Thanks for taking my question. So in terms of the margin results, $0.135 adjusted, can you help us on a high level with how much of that strength was driven by your kind of modest exposure to retail margins? And how much of it was driven by kind of your much larger wholesale business? I'm just trying to get a sense for just how the margin strength was shared between wholesalers and retailers.

Karl Fails -- Chief Operations Officer

Yes, John, that's a good question. We don't disclose a lot of detail around the margins by channel, but I can give you a general sense that I'd stay, the margins were higher in all of our channels of distribution. So obviously, where we've elected to keep some retail margin exposure. I mentioned Hawaii earlier as well as in the New Jersey turn hike. Those are really good retail markets, and we like the assets that we have there. And so we've definitely benefited from higher retail margins in those areas. But going down the value chain into some of our dealer and distributor business, we've also seen strong margins in those areas as well. So I think the breakeven costs that Joe mentioned, really is true. It's kind of easier to wrap your head around in the retail side, but it's also true in some of the wholesale channels, and we've seen stronger margins in all of them.

John Macalister Royall -- JPMorgan Chase & Co -- Analyst

That's helpful. And then just looking at Shneur's question from a slightly different angle. Given where you sit with leverage and you're performing quite well through a trough demand period, doing $700-plus million in EBITDA this year. Was there any thoughts to removing some of the conservatism around this year's capex and sort of leaning into this period instead of pulling back?

Joseph Kim -- President, President & Chief Executive Officer

Yes, John, I think that's a good point. And obviously, when we made the revision to our capex at the end of the first quarter, and I mentioned that in the prepared remarks that there was a heightened level of uncertainty. And now we have a lot more clarity. I would definitely say that we have the flexibility to deliver exactly what we said on the second quarter, but also at the same time, we have the flexibility because the demand for us to as far as signing up new customer is there. So I think we definitely have upside, and we're in a position where if the free cash flow. And we have like we guided to, have an excess cash that we can deploy to growth capital, we're in a good position to do that. But as of right now, we're not ready to go and whipsaw the market and say we went down on capex, go up on capex. But I will say we're in a position to actually do what you said.

John Macalister Royall -- JPMorgan Chase & Co -- Analyst

Thank you very much.

Operator

[Operator Instructions] Our next question is from Sharon Lui with Wells Fargo.

Sharon Lui -- Wells Fargo Securities -- Analyst

Hi, good morning. Gentlemen I just wondering if you can provide some color on your customer base and how they're faring in this environment. I guess given the strong margins, have you experienced any change in credit or collections? And is there any risk of potential closures of some of the smaller sites?

Karl Fails -- Chief Operations Officer

Sharon, what I'd say about our customers is that they have proven to be very resilient in general. So I think we mentioned last call that, obviously, in some cases, we work with customers on liquidity help or different things. I'd say, generally, that was temporary and the vast majority of our customer base has been resilient. If you look back on the history of the convenience store industry, which represents the majority of our customers, a lot of them are small, privately held, family based companies. And if you look at other periods of difficulty, where people thought that these businesses were going to struggle, they found a way to get through. I think that's panning out this year. They're good business operators, and they find a way to make it work.

Sharon Lui -- Wells Fargo Securities -- Analyst

Okay. And then I guess if you could maybe provide an update on J.C. Nolan and what you guys are seeing for diesel demand?

Karl Fails -- Chief Operations Officer

Sure. Obviously, with the lower drilling activity, we've seen some impact on the diesel business in West Texas related to the J.C. Nolan project. You look back at the beginning of the year, before the double black swan of the Saudi Arabia, Russia price war and then the COVID-related demand declines, the pipeline was performing very well. It was full and actually performing better than our projections for the project. Since drilling has slowed in the second quarter, we were below 50% of capacity on the pipeline. I will say we also have 200-plus retail sites in the market, and they generally continue to perform well. We've seen most of the impact on the diesel side. As we look forward, we still generally like the Permian as a favorite production region. And we've actually started to see some activity pick back up in the third quarter as crude prices seem to have found a floor around $40. So this part of our business in the second quarter was a drag on our earnings. But I think this is another example where our portfolio approach for the fuel distribution business has ensured that we still deliver solid results each quarter. And as we look forward, we expect that performance in J.C. Nolan to strengthen.

Sharon Lui -- Wells Fargo Securities -- Analyst

Great, thank you.

Karl Fails -- Chief Operations Officer

Thank you.

Operator

Our next question is from Gabe Moreen with Mizuho.

Gabriel Philip Moreen -- Mizuho Securities USA -- Analyst

Hey, good morning everyone. Just I think, Joe, you had mentioned last quarter about a lot of the cost savings sort of being fixed in nature and not necessarily part of the variable component. It seems like you're tracking maybe even above your expectations on the cost on the fixed side. So could you speak to that component? And then also, I appreciate that on the variable component of things, costs will rise as volumes increase. But how should we think about, I guess, non variable costs in the back half of the year?

Karl Fails -- Chief Operations Officer

Gabe, this is Karl. I'll comment on the cost. I think you hit really on the two buckets of how we look at our cost reductions, volume-related costs. As I mentioned in my remarks, with the lower volumes in the second quarter, clearly, we had more cost savings related to that. And as we've gone into the third quarter, some of those costs have come back in. On the fixed side, we did look through all of our cost structure, and we were able to take some fixed costs out of the business. And that's going to continue through the second half of the year and even into 2021. So I did say that you should expect that our costs will be higher in Q3 and Q4 than they were in Q2. But we're still tracking very well inside our guidance to $460 million to $475 million for the year.

Gabriel Philip Moreen -- Mizuho Securities USA -- Analyst

Then maybe if I could ask a question on the M&A landscape overall. If we are indeed at sort of a higher plateau on margins, just thoughts on kind of multiples around wholesale businesses out there, whether those will change as well, and also the degree to which people are you you're seeing are willing to transact given the uncertainty that's still out there.

Joseph Kim -- President, President & Chief Executive Officer

Yes, Gabe, as far as there's a couple of questions you have embedded in that. As far as the multiples for wholesale business, if I'm not ready to call that there's a new baseline for margins yet, but there are some encouraging signs. And as the shape of the recovery curve plays out, I think we'll get better and better insight into if there's a revised kind of new mean for margins. But I think definitely the direction is it's going to either revert back to what it was historically or it's going to be higher. I don't see a scenario where it actually goes below historic averages. If that's the case, obviously, that's conducive for any type of valuation for downstream assets. From an M&A standpoint, we're not seeing as much of like open processes coming in our direction. That's to say that there's some other nonopen going on, but we're just not seeing as much. I think it makes sense because people are still trying to sort through how to even interpret the last three months of information when you're down 30%, 40%, but your margins are up 30%, 40%. People are still trying to calibrate what that means going forward, both from a seller and a buyer perspective. For us, I mentioned it probably for the last three or four quarters that we've kind of switched over to a more organic strategy versus an acquisition strategy. If valuations go up, we still have our organic arm to go to go develop business for us. And that's why we worked so hard to develop that capability versus relying on an acquisition strategy for fuel distribution.

Operator

Thanks. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Scott Grischow for closing remarks.

Scott Grischow -- Vice President Investor Relations andTreasury

Well, thanks, everyone, for joining us on the call today. As always, please feel free to reach out to me with any follow-up questions. We'll talk to everyone soon.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Scott Grischow -- Vice President Investor Relations andTreasury

Karl Fails -- Chief Operations Officer

Joseph Kim -- President, President & Chief Executive Officer

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Theresa Chen -- Barclays Bank PLC -- Analyst

Spiro Michael Dounis -- Credit Suisse AG -- Analyst

John Macalister Royall -- JPMorgan Chase & Co -- Analyst

Sharon Lui -- Wells Fargo Securities -- Analyst

Gabriel Philip Moreen -- Mizuho Securities USA -- Analyst

More SUN analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.